U.S. economy is getting stronger, but . . .

Persistent headwinds likely to cap growth; watch out for ‘shocks’

WASHINGTON (MarketWatch) — Main Street and Wall Street have been buoyed by data that shows the U.S. economy is getting stronger, but nobody’s declaring happy days.

A string of reports on employment, manufacturing and housing all show the economy is on the mend after a sharp dip last summer. This week’s data’s is relatively light — home sales and consumer confidence top the list — but there’s little reason to expect the trend to be altered.

Faster growth has been spearheaded by U.S. manufacturers, which have boosted production and hiring to meet rising demand. Hiring has also picked up in most other sectors of the economy.

With more people working, there’s more money for consumers to spend — and spend they have. Auto sales have been particularly strong, hitting their highest rate of sales in January in three years. Even the dead-in-the-water housing market has shown signs of revival.

All the upbeat news, however, should be viewed with caution. The U.S. suffered so much damage in the last recession — the jobless rate has been above 8% for 36 months — that it could take several years or longer before the economy returns to “normal.” And that’s assuming no more setbacks.

“It’s a much better environment compared to six months ago, but we shouldn’t overstate growth,” said Stephen Stanley, chief economist of Pierpont Securities. “The momentum is moving in the right direction.”

The biggest threat to the recovery, most economists believe, are what they like to call “external factors” or “external shocks.” That is, events overseas over which the U.S. has little or no control.

In early 2011, for instance, the U.S. economy appeared to be turning the corner, but a huge Japanese earthquake and soaring gasoline prices triggered by the Arab Spring slammed the breaks on global growth.

A recent rise in gasoline prices — and predictions of stiffer increases to come — have renewed concerns about whether fuel costs will hamper the U.S. economy once again. And the threat of European meltdown triggered by a Greek default continues to linger.

Even without an external shock, the U.S. still faces an obstacle-strewn path. The pace of job growth, while markedly higher in the past six months, is still not fast enough to slash the nation’s 8.3% unemployment rate to precession levels of 5% to 6%.

Consumers, for their part, probably have to put more cash aside after drawing down their savings in the final months of 2011 to pay for new cars and other holiday purchases. That’s why most economists expect first-quarter growth to slow to 2% from an initial reading of 2.8% in the fourth quarter.

What might help consumers are lower energy prices in January owing to unusually warm winter weather. Bills for electricity and home-heating fuel plunged last month and offset a sharp increase in gasoline prices.

The bout of nice winter weather raises another concern — namely that the economy’s good performance in January is overstated. Extra business that took place last month might not happen in February or March, subtracting from growth in those months. See the impact of warm weather on utilities output.

“Housing numbers are higher because of the weather,” said economist Patrick Newport at IHS Global Insight.

Sales of new and existing homes, whose numbers will be reported this week, could also reap the benefit of warmer weather.

That’s not to say the housing market isn’t getting any better. It is. The problem is, the industry is emerging from its worst slump in modern times and is still extremely weak.

Newport estimates that housing starts and permits to build new homes should average about 1.5 million annually in a healthy economy. He expects housing to improve in 2012, but he doesn’t see any evidence of a huge rebound.

The key, as always, lies in employment. If jobs become plentiful, people will increase spending and buy more houses. Yet economists are wary of expecting the net job increase in January — 243,000 — to become the monthly norm.

“It’s not like the economy is hitting on all cylinders,” Stanley said.

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